Budgeting For Your Business

As you head towards the end of another financial year and look forward to the next one you should seriously consider preparing a budget in your business.

Preparing a budget for your business (and even personally) is highly recommended. This is because a budget sets some goals and targets to work towards and once you’re in the thick of things you can measure your performance against it. The budgeting process forces you to look at your financial health and a longer-term prognosis for the business. It is a time to rise above the day-to-day activities and really think about where you’ve been, where you are going and how you are going to get there. Consider seeking business advisory services to gain tailored solutions for your budgeting needs.

Starting point for your budget

A good starting point for your budget is the current financial year you are in. Work out what your goals for the upcoming year are, and make sure to account for all your expenses, including both fixed and variable costs. This may include increased sales, reduced costs and new assets. Start putting together the numbers. A key consideration is that you want the budget to be ambitious but realistic.

Understanding Business Finances

Understanding your business finances is the cornerstone of creating an effective budget. It involves a deep dive into your financial objectives, financial health, and overall business performance. Financial objectives might include goals like increasing revenue, reducing costs, and boosting profitability. Financial health, on the other hand, refers to your business’s ability to meet its financial obligations, such as paying bills and debts on time. Business performance is all about your ability to generate profits and achieve your financial objectives.

To get a clear picture of your business finances, you need to meticulously track your income and expenses. This includes fixed costs like rent, utilities, and software subscriptions, which remain constant regardless of your business activity. Variable costs, such as sales commissions, materials costs, and labor costs, fluctuate with your business operations. Additionally, one-time expenses, like purchasing new equipment or facilities, should also be accounted for. By understanding these financial elements, you can create a robust budget that supports your business goals.

Creating a Business Budget

Creating a business budget is a strategic process that involves allocating funds to various expense categories, prioritizing essential expenses, and making necessary adjustments. A comprehensive business budget should encompass income, expenses, and profit/loss. Income sources include revenue from sales, services, and investments, while expenses cover fixed costs, variable costs, and one-time expenditures.

To start, list all your income and expenses, including both estimated and actual income and expenses. This will give you a clear picture of your financial landscape. Next, allocate funds to each expense category, ensuring that essential expenses like rent, utilities, and salaries are prioritized. It’s also wise to invest in areas that drive growth or stability, such as inventory, marketing, or necessary overheads. By carefully planning and allocating your resources, you can create a financial budget that supports your business’s long-term success.

Estimating Income and Expenses

Estimating income and expenses is a critical step in the budgeting process. Accurate income estimation involves predicting revenue from sales, services, and investments. This can be achieved by analyzing historical sales data and marketing trends, as well as considering factors like market conditions, customer demand, and competition.

For expense estimation, start by reviewing historical expense data to understand your fixed costs, variable costs, and one-time expenses. Fixed costs, such as rent and salaries, remain constant, while variable costs, like materials and labor, can fluctuate. One-time expenses, such as equipment purchases, should also be factored in. By considering these elements and external factors like market conditions and competition, you can make more accurate financial predictions and create a realistic budget.

Types of business expenses

Expenditure tends to fall into two main categories – fixed and variable. Fixed costs are those costs that you are going to incur regardless of how much income you generate like rent, salaries and insurance. Variable costs fluctuate depending on the activity in the business like raw materials, contractors and travel. The third category of expenditure is the one-off expenditure. This includes expenses that you may only incur every couple of years. Examples are tradeshows, advertising campaigns and the purchase of fixed assets. You also need to look at seasonal fluctuations. For example, if you are in a business that has periods that are busier than others due to some external factor like weather. A budget is an important financial statement that helps in planning and managing your business finances effectively.

Business Budgeting Strategies

Effective business budgeting strategies can significantly enhance your financial planning. One of the most useful tools is accounting software, which helps you track income and expenses, allocate funds to different categories, and make necessary adjustments. This software can streamline the budgeting process and provide valuable insights into your financial performance.

Creating a budget template is another effective strategy. A well-designed template simplifies the budgeting process and ensures that all necessary expense categories are included. Regularly reviewing and updating your budget is also crucial. This practice allows you to identify areas for improvement, make informed financial decisions, and stay on track with your financial goals. By implementing these strategies, you can create a dynamic and effective budgeting process that supports your business’s financial health and growth.

When to prepare a financial budget

Ideally a budget is prepared ahead of time with the best possible information available at the time. Things do change and this must be recognized as you go along. Key assumptions can change so you will need to adapt accordingly. The original budget document then turns into a forecast – a living document that is updated for these changes on a more frequent basis.

Business Like NZ Limited is well versed in budget and forecast preparation so contact us should you require some assistance.

Article by Rachel D